US army Major General Paul Eaton said the Iraqi soldiers had told the American military they had not signed up to fight fellow Iraqis, according to the Washington Post on Sunday.
"(Eaton) declined to characterise the incident as a mutiny, but rather called it 'a command failure'," the Post said.
It quoted Eaton, who is overseeing the development of the post-Saddam Iraqi security forces, as saying the 620-man 2nd Battalion of the Iraqi Armed Forces refused to fight last Monday after members of the unit were shot at in a Baghdad neighbourhood while on their way to Falluja.
The commander of US forces in Iraq, Lieutenant General Ricardo Sanchez, said the incident showed there were difficulties still to be overcome with the Iraqi forces.
"This one specific instance did in fact uncover some significant challenges in some of the Iraqi security force structures that have been put into place over the course of the last six months," he said on NBC's Meet The Press.
"We knew that there were some risks that we were taking by standing up security forces quickly. And we also know that it's going to take us a while to stand up reliable forces that can accept responsibility for both the internal and the external security of the country," he said.
The Post said it was the first time US commanders had tried to involve the new Iraqi army in major combat and the battalion's refusal to fight "is casting new doubt on US plans to transfer security matters to Iraqi forces".
"The lines are blurring for a lot of Iraqis right now and we're having problems with a lot of security functions," it quoted Eaton as saying.
US troops besieged the town
for several days
The 2nd Battalion is one of four in the new Iraqi army. It graduated from training camp on 6 January.
Eaton told the Post the battalion's mission in Falluja would have been to help with secondary military tasks such as manning roadblocks and securing the perimeter.
He said one problem was the Iraqis were not told they would have a relatively benign role. "The battalion thought it was going to be thrown into a firestorm in Falluja," he said.
Eaton described the situation as "a command failure" and refused to characterise it as a mutiny.